Blog

Voting Rights of Vesting Shares

One of the most asked questions I receive when setting up new startup companies is “Do my vesting shares have any voting rights?” Or in other words, does a stockholder only get to vote based on their amount of vested shares? Since most of the times a founder subjects their entire share amount to a vesting schedule and the founder starts with zero vested shares, this is a critical question.

Do Unvested Shares Get to Vote?

And the answer is simple — shares, whether vested or unvested, come with all associated voting rights. Put another way, on day one, regardless of your vesting schedule, you own every single share of stock that you have purchased or been granted, even if you subject the entire amount to the typical 4-year with a one-year cliff vesting schedule. Therefore, since you own all the shares on day one, you have all the voting rights on day one.

The reason for the questions regarding voting rights of vesting shares comes from the uncertainty as to what vesting and/or a vesting schedule actually means. Remember that when you have stock that is vesting, this simply means that the amount of unvested stock as determined by the vesting schedule is subject to a repurchase option by the company (as detailed in your stock purchase/grant agreement). Thus, as your shares vest, fewer shares of your stock is subject to this repurchase option. But, practically speaking, you are not getting “more shares” each time you vest. Since you hold all the shares on day one, regardless of the vesting schedule, you can vote all of your shares.

What About Unvested Options?

Like shares of vesting stock, vesting of options do not affect the voting rights of optionholders, but the outcome is different. With options, as they vest you receive only the right to purchase shares and you are not a shareholder until you actually exercise your option. You can hold 1,000,000 vested options yet still not be a shareholder. Thus, neither unvested or vested options come with any voting rights. It’s not until you exercise your option to purchase the shares, then do you receive the shares and the rights associated with them, including the right to vote.

ACCELERATE YOUR STARTUP LAW KNOWLEDGE!

Startup Law doesn’t have to be a confusing maze. The practical knowledge in "Acceleration: What All Entrepreneurs Must Know About Startup Law" will help you make the smart decisions to protect your startup and its future. Available in ebook and hardcover.